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January 24, 2018

Fixed Price or Time & Material – Which Engagement Module to Select for your project?

Initial outsourcing agreements were traditionally built upon fixed price model, though nowadays there is another widely used business model, namely time-and-material.

The right project engagement model should fit company’s operating strategy, contracted requirements and goals, and the general expenses borne by the vendor.

These software development engagement models are the most common and time-proven; however, it is worth noting that today companies also apply their hybrid and combinational approach. In this blog, we will review the pros and cons of Fixed Price vs Time and Material Engagement models and their practical use for software projects. We will also throw some light on how Rigel Networks can help you in understanding and ultimately choosing the right business model as per your needs.

Fixed price Engagement:

As the name implies, a fixed cost structure is one where the price is set in stone. The agency determines pricing based on the specific services and needs outlined in the client’s proposal, regardless of the time investment the agency might incur. Usually, fixed cost contracts are milestone-based. It can be an effective choice in those cases when requirements, specifications, and rates are highly predictable, or requirement is clear, else the cost will be anything but constant. The client should be able to share his clear vision of the product with developers to ensure appropriate final results.

Pros:

1) Easier to close projects

When service provider creates a fixed-priced scope, he takes the financial risk off from the client and puts the burden on his agency. Being simply explicit about what he will do and how much he will do, he makes it easier for the client to say yes or no.

2) No surprises for the client

When you’re quoting a fixed-price project, your client will rest assured knowing they won’t get a call from you halfway through the project asking for more budget because you misquoted how many hours or how much effort a part of the project will take. It becomes your responsibility to know these things up front and convey it to the client with confidence.

3) Predictability

The core factor that any entrepreneur seeks for in business is predictability. Company strategy usually requires clear deadlines and figures to be transferred to the budget. Planning expenses for 1-3 months ahead can provide you with exact figures. However, if product development will last for 4 months and more, it is only natural that you can hardly foresee overall outlays and in such cases other price models are advisable.

4) Transparency

With specified requirements, fixed budget and pre-arranged deadlines – there won’t be any surprises. Regular project management interaction with the contractor ensures scope compliance and protects margins.

Cons:

1) Clients don’t always express all their needs up front

You have years of experience building websites and apps, often your clients may not. Consequently, clients may have a difficult time expressing what they need or what’s involved in creating it. Success in using fixed-price quotes highly depends on your ability to listen to them, ask the right questions, and draft a clear scope of work that gets them from the beginning to the final stage of the project.

2) Some projects won’t fit this model

A good skill to add to your toolbox is to know which projects won’t fit this model from the get-go as they may have constantly changing needs. This happens more often with larger projects (say a large eCommerce build). Do not offer the client a fixed-price scope if you won’t be able to deliver.

3) Lack of flexibility

Owners must understand that the lump-sum nature is adamant; they are responsible for any unforeseen changes that are beyond the service providers control or that the owner initiates.

4) Less accountability

Can be referred to as both pros and cons, depending upon each particular case. Such approach doesn’t comprise regular reports and interactions between the customer and team. All the management is mainly carried out by the Service provider team member, so the client doesn’t have to allocate timeslots for deep project involvement. Nevertheless, it doesn’t mean that client will be in the dark about the workflow.

Time and material (T&M)

Time and material (T&M) Engagement is absolutely different. It presupposes billing clients for actual work scope based on hourly rates of resources. Customers are charged based on resource working hours spent on a specific project, plus costs of materials. The main advantage of T&M engagement model is flexibility and opportunity to adjust requirements, shift directions, replace features, and involve users to get the Perfect product.

Pros:

1) More Flexibility with Time & Material

Since you pay for hours, you have the ability to make as many changes and requests as you’d like—understanding that more changes equal more hours. Want to rethink this? Want to adjust that? You can request all these things without having to change the contract, making it a great option for projects with many associates.

2) Better timing

Avoiding fixed-price bidding process helps to save time and start immediately. Moreover, blended rates allow you to see how much time team spends on each feature and commit, and so motivate it to work more efficiently.

3) Dynamic work scope

It is one of the key features within larger projects. There can be a general goal that should be achieved, however knowing how it’ll be reached is not that important beforehand. Often for startups and mid-sized companies, it is better to make decisions in the process, evolving a strategy and building custom software simultaneously. Such approach underlies Agile methodology.

4) Lack of scope clarity

For whatever reason, if an owner cannot initially define or detail the scope of work, a T&M agreement is best suited.

Cons:

1) Involvement

Time and materials are best for clients who require the freedom to make changes to the project’s specifications as they see fit. Deep involvement is required from Client to make sure that team is delivering toward the approved scope and within the correct number of hours.

2) Project deadlines

Deadlines may change as the scope of work is updated so it’s harder to predict when exactly the product will be completely ready.

3) Higher Risk with Time & Material

As a client, you are paying for the changeability of the project. While the agency can estimate a dollar amount, clients should keep in mind that it could go 1 of 3 ways. First, the project could cost the estimated amount. Second, the project could cost less than the estimated amount. And third, the project could cost more than the estimated amount. Why is this? Because the client is paying for hours, not outcomes.

4) Budgeting risk

The biggest disadvantage of a T&M engagement is the final costs can rise above the budgeted amount. For example, using a T&M method where a project budget is $400,000, it could end up costing $300,000 or even $600,000! With a T&M approach, you own the risk of that variability.

Considering the foregoing Fixed price vs T&M engagement model comparison, it is essential to weigh all the strengths and weaknesses of each service provider type and how they can fit in your project. Considering the pros and cons of each model, we would vouch for Fixed Price Model as more preferable. If you still cannot decide on one of the pricing models, you can request a free quote from our team with brief recommendations on your project.

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